Any thoughts of a Santa Claus rally going into the holiday season quickly faded this week for the TSX Index as investors witnessed four successive days of losses. While the TSX Index did manage to post a gain on Friday, it was little consolation for a market that was down over 3% by the time the week finished.

A few events contributed to the declines. For starters, investors were not particularly impressed with the European Union’s proposed “fiscal pact” from last weekend as it did not address immediate debt concerns and they were even less impressed with the European Central Bank which still refused to increase its bond purchasing program.

When Wednesday arrived the Federal Reserve held its last meeting for 2011; however, the U.S. central bank signaled no change to its monetary policy and little change to its message. There were some investors who thought we might see a new round of quantitative easing, but they were left disappointed.

However, the fact the Federal Reserve had no desire to flood the market with money actually supported the U.S. dollar and put downward pressure on gold and precious metal prices. The TSX Index in particular was hit hardest from the decline in bullion prices as gold equities, both large cap and small cap, faced increasing selling pressure.

Oil prices also had an interesting ride this week as rumours of Iranian military drills in the Strait of Hormuz attracted speculators. However, by the end of the week the geopolitical rhetoric had died down, global demand estimates for 2012 had declined and OPEC decided on Wednesday to increase its production target for the first time in three years. These factors combined put downward pressure on oil prices which managed to finish the week north of US$93.00 per barrel.

On the currency front, the strength of the U.S. dollar dominated most headlines as we saw the corresponding fall of the Euro continue. Considering Canada’s sensitivity to commodity prices and the declines we saw in gold and crude, it comes as no surprise that the Canadian dollar lost ground to its U.S. counterpart with the loonie managing to close out the week just above US$0.96.

Gold Loses its Shine this Week

TSX Index weakness can be attributed to a number of factors; however, the fall in gold prices was one of the more significant contributors. The price of bullion fell over US$100 per ounce this week, resulting in a decline for mining stocks. The weakness can be explained by a strengthening U.S. dollar which was a result of continued fears over European debt driving investors out of the Euro and into the U.S. currency.

While it is true that investors look to gold as a safe haven during times of uncertainty, 2008 taught us that during times of financial crisis investors will always turn to the U.S. dollar. So is the gold rally of the past decade now over? We think not. We recognize that continuing European debt concerns will persist into 2012 and that could hold back gold performance in the near term, but we also recognize central banks around the world are likely to continue printing more money next year which should help support gold prices in 2012.

The Trading Week Ahead

Considering we are only about a week away from Christmas, it comes as no surprise that the number of corporate earnings releases next week is rather small. However, some of the companies reporting south of the border such as NIKE Inc, Oracle Corp, General Mills and Walgreen Co are still fairly large companies and their results will be followed closely to paint a picture of what we’re seeing from the U.S. consumer and business investment.

On the economic front, next week will have a decent flow of data for investors to digest. In particular, we’ll see a number of statistics on U.S. housing. Unfortunately, the story they’ll tell will likely be the same depressed tale we’ve heard for a number of years now as housing starts and new home sales will likely remain low. In Canada, we’ll see inflation statistics that are unlikely to concern the Bank of Canada and retail sales which will hopefully show a month over month improvement.

The movement of the U.S. dollar and commodities will continue to be dictated by the ongoing debt problems in Europe, a pattern that will likely persist well into January as more European government refinancing measures are required. Such concerns are likely to put short term pressure on the commodities complex as will tax loss selling.

Unfortunately, with commodity prices under pressure, it’s unlikely that cross border shoppers are going to get any help for the Canadian dollar before holiday shopping season ends.

This is our last Weekly PULSE for 2011 as we will return with our next publication on Friday January 6, 2012. On behalf of everyone at Richardson GMP, we’d like to wish you and your families all the best for the Holiday Season and best wishes for a happy and prosperous new year.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends.
@Gareth_RGMP